What are Trusts?
- What is it? A Trust is an entity “a Trust” established to hold title to assets of Settlor(s) (the individual or spouses who set up the trust) to be administered by Trustee(s) for the benefit of the named Beneficiaries. Trusts are set up for many reasons.
2. One leading reason is to protect the assets in the Trust from the claims of creditors of the Beneficiaries of the Trust. For example, a parent could set up a trust to hold funds for a child’s education, medical expenses, ability to start a business, protect from a divorcing spouse, etc. As an illustration of just two situations that can commonly happen imagine that funds were put into a trust for a child’s education, then that child was involved in an auto accident and the injured party sued. Typically, the insurance carrier would settle the case; but, if the damages were extensive there could easily be what is known as “excess damages”, meaning damages that exceed the limits of the insurance policy covering the vehicle the child was driving. In that case the funds in the trust held for the child would be protected from the claims of the injured party and the child could attend school without worrying if some could seize the funds used to pay for college.
Second, imagine that the family had built up a profitable business and wanted the child to now manage and own a part of the business. Any property acquired during marriage is considered community property. If the parents put the business into a trust then, the if a spouse of the child later divorces the property is not part of the community estate of the husband and wife subject to division by the court in a divorce suit.
3. Trusts are set up to hold property for the benefit of individuals who cannot manage such properties for themselves due to age (being a minor), inability to handle business matters, etc.
4. Trusts are set up to hold assets for multi-generations of a family to preserve the assets for the use and enjoyment of succeeding generations. Recreational properties, expensive art work, homes, etc.
These are only a few of the reasons Trusts are set up.
- How is a Trust Established? The Settlors execute the instrument setting up the Trust and then “fund” the trust by transferring assets to the trust by signing deeds and/or assignment of personal assets.
Through proper planning and drafting a Trust can shelter in excess $10,000,000 of net assets for a husband and wife to be passed on to their heirs tax free. Proper tax planning can be important because once the exemption amount ($5,000,000 + per individual) is passed, the estate tax rate starts at 45% on all value that exceeds the exemption amount.
Mouse over the “Practice Areas” above and then “Trusts” to see more explanations for the Revocable Living Trust, an Estate Planning Information Form if you would like to have a trust created for you and an explanation for Other Trusts.